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Three estate taxes: easy to name, difficult to understand

You know the old saying, "The only things that are inevitable in life are death and taxes." What happens when the two come together? The truth is that a lot of people are unprepared for the tax liability that can quickly eat away the legacy they want to leave their children or other beneficiaries.

One source of confusion is knowing which taxes apply. For estates in New Jersey, there are three potential taxes. Whether your estate will get hit with a liability (and the amount) depends on the value of the estate and type of asset.

The federal estate tax

Following your death, your property will be subject to taxation at the federal level, which, according to the IRS, "is a tax on your right to transfer property at your death." This federal estate tax takes into account the individual's ownership of assets and their value at time of death, not necessarily how much they were when they were acquired. Whether the estate will actually incur a liability depends on the total value and the year in which it was probated, $5,450,000 or above in 2016 for example.

The total value is referred to as the "Gross Estate," and could include such property as:

  • annuities
  • business interests
  • cash
  • insurance
  • real estate
  • securities
  • trusts

In addition to collecting federal estate tax, the State of New Jersey also collects both an estate and inheritance tax. If an estate has a value above $675,000, under current New Jersey state law, it is subject to an estate tax. The inheritance tax is different, though, because it's applicable to estates of any size, and is based on how closely related the deceased person is to those inheriting.

  • The transfer inheritance tax: In the state of New Jersey, when the transfer of real and personal property occurs within state lines, the transfer of property tax applies. This tax applies to real and tangible property for non-resident defendants so long as it is located within state lines. Intangible personal property is also applicable to resident decedents no matter where it is situated.
  • New Jersey estate tax: Along with a transfer of inheritance tax, an estate tax is imposed to estates of decedents who resided in New Jersey. According to the State of New Jersey Department of the Treasury, "An Estate Tax is payable if the inheritance tax paid to New Jersey is less than the portion of the federal credit for state death taxes which is attributable to New Jersey property."

Sorting complications: the need for experience

If the general descriptions above do not clarify the situation, you are not alone. Tax matters are incredibly complex, something that can trip up many people, including estate planning attorneys with little experience or familiarity with taxes.

Due to the incredibly complicated nature of estate taxes, it's necessary for individuals to seek the advice of an experienced estate planning attorney who is well-versed in tax law. That way, risk can be minimized, mistakes avoided, and unnecessary liabilities averted.

The attorneys at Donnelly Ritigstein Law Offices understand the extremely complicated nature of federal and New Jersey estate taxes and know how to sort out complications and provide excellent planning advice.

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